Debt talks feature dire warnings, a possible compromise

President Barack Obama, right, sits with from left, House Minority Whip Steny Hoyer of Md., House Majority Leader Eric Cantor of Va., House Minority Leader Nancy Pelosi of Calif., and House Speaker John Boehner of Ohio, as he met with Republican and Democratic leaders regarding the debt ceiling, Thursday, July 14, 2011 in the Cabinet Room of the White House in Washington.

WASHINGTON — With time growing short and warnings more dire, the first, fragile signs emerged Thursday of a possible compromise to raise the nation's debt limit and avert a potentially catastrophic default on Aug. 2.

Under a plan discussed by the Senate's top two leaders, President Barack Obama would receive enhanced authority to raise the debt limit while procedures would be set in motion that could lead to federal spending cuts.

Word that Majority Leader Harry Reid, D-Nev., and Republican leader Mitch McConnell of Kentucky were at work on the fallback plan came as Federal Reserve Chairman Ben Bernanke and JPMorgan Chase CEO Jaime Dimon admonished bickering lawmakers that failure to avoid an unprecedented default could have a devastating effect on an already anemic U.S. economy.

It was unclear when McConnell and Reid might unveil their legislation, or whether they would first present their ideas to Obama and others involved in the daily meetings at the White House. A new session was under way late Thursday.

One option under discussion by the Senate leaders is creation of a group of lawmakers who could recommend spending cuts, possibly including changes in benefit programs, that would be guaranteed a yes-or-no vote in Congress.

Another would be to couple any presidential request for a debt increase with spending cuts, including some that have emerged in private talks led first by Vice President Joe Biden, and now by Obama.

The seriousness of the situation was underscored throughout the day.

Testifying before a Senate panel, Bernanke said a default would deal a "self-inflicted wound" to the nation's economy, driving up interest rates and slowing recovery from the deep recession.

Dimon, speaking to reporters in New York, said default could prove catastrophic. "Why take that chance? I wouldn't take that chance," he said, answering his own rhetorical question.

Obama met with congressional leaders at the White House for a fifth straight day, although press secretary Jay Carney cautioned not to expect a "hallelujah moment" when it was over.

Talks have been stymied by a dispute over tax increases as part of any deal to cut future deficits. Obama and Democrats want them, while Republicans don't.

The concept under discussion by the Senate leaders is a more elaborate version of a plan McConnell suggested earlier in the week to a less-than-enthusiastic reception from conservatives.

In his first substantive remarks on McConnell's initial suggestion, Speaker John Boehner told reporters, "What may look like something less than optimal today, if we're unable to get an agreement might look pretty good a few weeks from now."

Carney made no direct mention of the plan, but said if there was no progress toward a bipartisan agreement on cuts by Friday, "then we have to begin looking at making sure that we fulfill our obligations to uphold the credit rating of the United States."

He did not elaborate.

Whatever choice was made, it was clear time was running out.

Treasury Secretary Timothy Geithner met privately at the Capitol with Senate Democrats, emerging to say: "We have no way to give Congress more time to solve this problem."

So the alarms covered a broad front: Geithner is a senior official in the Obama administration, Bernanke is the nation's central banker and Dimon the head of one of Wall Street's best-known firms.

Similar warnings have been directed at lawmakers repeatedly since Geithner announced that Aug. 2 was essentially the day of reckoning. The Treasury has been relying on unusual measures since early May to avoid breaching the current debt ceiling, which stands at $14.3 trillion.

These warnings have taken on an increased urgency recently. Moody's Investor Service has announced it is reviewing America's bond rating for a possible downgrade, and a Chinese rating agency, Dagong Global Credit Rating Co., also now has advised of a possible downgrade.

Congress and the White House have responded to the warnings with a spate of high-profile meetings — but little if any apparent progress toward a solution.

Boehner also took steps during the day to present a common front with House Majority Leader Eric Cantor, his second-in-command, who has seemed at times to take a dominant role in the White House talks.

Reid criticized Cantor in unusually personal remarks on the Senate floor, saying he "has shown he shouldn't be at the table."

"And Republicans agree he shouldn't be at the table," he added, referring to published accounts of other GOP lawmakers criticizing Cantor anonymously.

Cantor brushed aside the criticism, and Boehner came to his defense at a news conference. "We have been in this fight together," he said, placing his arm around Cantor's shoulder, adding that any report that the Virginian has been "anything less than helpful is just wrong. ... We're in the foxhole."

Cantor and other members of the party leadership balked several days ago when Boehner privately shared details of a possible sweeping deal with Obama that could have meant higher taxes. The speaker announced he would no longer pursue the plan.

Apart from his role in the White House talks, Cantor staged a high-profile walkout from an earlier set of negotiations led by Biden, irritating some Democrats who noted the talks were near an end anyway.

Ironically, the cuts aired in those earlier conservations have moved center-stage in the White House talks, according to officials in both parties.

And Thursday's talks involving Obama were expected to focus in part on cuts in benefit programs, and in part on Democratic calls for higher government revenues — the very subject that triggered Cantor's earlier walkout.

Democrats have worked assiduously to exploit any differences between the two men. And for now, at least, the attention focused on Republicans has largely obscured the deep divisions among Democrats over the wisdom of reining in the cost of politically popular benefit programs such as Medicare and Social Security.

For their part, Republicans have advanced a stream of conservative proposals that have little chance of clearing a Democratic-controlled Senate.

At a news conference during the day, 10 Republicans took turns making the case for a balanced budget amendment to the Constitution, expected to come to a vote in the House next week.

Asked if the spending plan they had pushed through the House earlier this year would comply at any point in the next decade with their constitutional amendment, Boehner said, "I don't know, you'll have to ask" Rep. Paul Ryan, chairman of the Budget Committee and the plan's principal author.

The House-GOP-passed budget would generate deficits for more than a decade into the future, according to the Congressional Budget Office, and add about $9 trillion to the current debt in 10 years.

Associated Press writers Laurie Kellman, Ben Feller, Julie Pace, Martin Crutsinger and Erica Werner in Washington and Pallavi Gogoi in New York contributed to this report.